List of Tables

Table 1: Summary of Major Provisions of H.R. 667, H.R. 1587, H.R. 1828, H.R. 2050, and H.R. 2944 as reported

Summary

Once considered the nation's most regulated industry, the electric utility industry is evolving into a more competitive environment. Currently, the focus of this development is the generating sector, where the advent of new generating technologies has lowered both entry barriers to competitors of traditional utilities and the marginal costs of those competitors below those of some traditional utilities. This technological advance has combined with legislative initiatives, such as the Energy Policy Act (EPACT), to encourage the introduction of competitive forces into the electric generating sector.

The questions now are whether further federal legislative action is desirable to encourage competition in the electric utility sector and how the transition between a comprehensive regulatory regime to a more competitive electric utility sector can be made with the least amount of economic and service disruption.

Nine comprehensive restructuring bills have been introduced in the 106^th Congress to build on actions by the Federal Energy Regulatory Commission (FERC) encouraging wholesale competition. A "comprehensive approach" to utility restructuring involves three components: (1) provisions for retail competition (called "retail wheeling"), which permit retail consumers to choose from whom they obtain their electricity supplies; (2) provisions reforming Section 210 of the Public Utility Regulatory Policies Act (PURPA), which provides cogenerators and small power producers a guaranteed market for their power; and (3) provisions reforming the Public Utility Holding Company Act (PUHCA), which regulates various financial transactions of holding companies that have interests in public utility companies. H.R. 667, introduced by Representative Burr, S. 516, introduced by Senator Thomas, H.R. 1587, introduced by Representative Stearns, H.R. 1828, introduced by Representatives Bliley and Dingell for the Administration, H.R. 2050, introduced by Representative Largent, S. 1284, introduced by Senator Nickles, H.R. 2944, introduced by Representative Barton,S. 2098, introduced by Senator Murkowski, and S. 2886, introduced by Senators Gramm and Schumer, contain all three.

The nine bills differ with respect to several aspects of restructuring the electric utility industry. Only S. 2886 contains a federal mandate for retail competition by a specific date (January 1, 2002). H.R. 667, S. 516, H.R. 1587, H.R. 2944 and S. 2098 contain no federal mandate; rather, they encourage the states to develop retail competition programs. H.R. 1828 and H.R. 2050 mandate implementation by a specific date, but permits states and nonregulated utilities to "opt out" under certain circumstances. S. 1284 removes any federal authority for states to maintain exclusive utility franchises or discriminate against consumer choice. The bills also differ in their approach to "stranded" costs. S. 516, H.R. 1828, and S. 1284 leave the decision about any stranded cost recovery to the states. H.R. 667, H.R. 1587, H.R. 2050, H.R. 2944, and S. 2098 provide for federally guaranteed stranded cost recovery from PURPA-mandated contracts only, but differ in some details. S. 2886 limits state recovery provisions enacted after July 1, 2000. Finally, all approaches have provisions for the prospective repeal of Section 210 of PURPA (the mandatory purchase requirement) and of PUHCA, although they differ in details.

The Federal Power Act (FPA) and the Public Utility Holding Company Act (PUHCA) of 1935 established a regime of regulating electric utilities that gives specific and separate powers to the states and the federal government. State regulatory commissions address intrastate utility activities, including wholesale and retail rate-making. State authority currently tends to be as broad and as varied as the states are diverse. At the least, a state public utility commission will have authority over retail rates, and often over investment and debt. At the other end of the spectrum, the state regulatory body will oversee many facets of utility operation. Despite this diversity, the essential mission of the state regulator is the establishment of retail electric prices. This is accomplished through an adversarial hearing process. The central issues in such cases are the total amount of money the utility will be permitted to collect and how the burden of the revenue requirement will be distributed among the various customer classes (residential, commercial, and industrial).

Under the Federal Power Act, federal economic regulation addresses wholesale transactions and rates for electric power flowing in interstate commerce. Federal regulation followed state regulation and is premised on the need to fill the regulatory vacuum resulting from the constitutional inability of states to regulate interstate commerce. In this bifurcation of regulatory jurisdiction, federal regulation is limited and conceived to supplement state regulation. The Federal Energy Regulatory Commission (FERC) has the principal function at the federal level for the economic regulation of the electric utility industry, including financial transactions, wholesale rate regulation, interconnection and wheeling ⁽¹⁾ of wholesale electricity, and ensuring adequate and reliable service. In addition, to prevent a recurrence of the abusive practices of the 1920s (e.g., cross-subsidization, self-dealing, pyramiding, etc.), the Securities and Exchange Commission (SEC) regulates utilities' corporate structure and business ventures under the Public Utility Holding Company Act (PUHCA, Title 1 of the Federal Power Act).

This regulatory regime changed little between 1935 and 1978. Beginning in 1978, primarily in response to the "oil crisis," laws were passed to encourage the development of alternative sources of power. The Public Utility Regulatory Policies Act of 1978 (PURPA) was enacted in part to augment electric utility generation with more efficiently produced electricity and to provide equitable rates to electric consumers. Section 210 of PURPA requires that a public utility purchase the power produced by qualifying facilities (QFs, generally small producers and cogenerators ⁽²⁾). In addition to PURPA, the Fuel Use Act of 1978 (FUA) helped QFs become established. Under FUA, utilities were not permitted to use natural gas to fuel new generating technology. QFs, which are by definition not utilities, were able to combine the availability of natural gas and new, more efficient generating technology, such as combined-cycle, with a regulatory system that provided them with a captive market that priced their product at their local utility's "avoided cost." The introduction of new generating technologies lowered the financial threshold for entrance into the electricity generation business and shortened the lead time for constructing new plants. FUA was repealed in 1987, but by this time QFs and small power producers had already gained a portion of the total market for electricity supply.

This influx of QF power challenged the cost-based rates that previously guided wholesale transactions. Before implementation of PURPA, FERC approved wholesale interstate electricity transactions based on the seller's costs to generate and transmit the power. As more nonutility generators entered the market in the 1980s, these cost-based rates were challenged. Since nonutility generators typically do not have enough market power to influence the rates they charge, FERC began approving certain wholesale transactions whose rates were a result of a competitive bidding process. These rates are called market-based rates.

Most recently, the Energy Policy Act of 1992 (EPACT) furthered competition in electricity supply by removing several regulatory barriers to entry into electricity generation. Specifically, EPACT provides for the creation of new entities, called "exempt wholesale generators" (EWGs), that can generate and sell electricity at wholesale without being regulated as utilities under PUHCA. Under EPACT, these EWGs are also provided with a way to assure transmission of their wholesale power to a wholesale purchaser. However, EPACT does not permit the FERC to mandate that utilities transmit EWG power to retail consumers (commonly called "retail wheeling"), an activity that remains under the jurisdiction of state public utility commissions.

In line with EPACT, FERC issued a Notice of Proposed Rulemaking, since called the Mega-NOPR, to allow more competition in the generation sector by ending the utilities' transmission dominance. On April 24, 1996, FERC issued two final rules on transmission access. In issuing its final rules, FERC concluded that these Orders will "remedy undue discrimination in transmission services in interstate commerce and provide an orderly and fair transition to competitive bulk power markets." Under Order 888, the Open Access Rule, transmission owners are required to offer both point-to-point and network transmission services for wholesale power transactions under comparable terms and conditions that they provide for themselves. The rule stipulates a single tariff providing minimum conditions for both network and point-to-point services and the non-price terms and conditions for providing these services and ancillary services.

However, there is debate over whether Order 888 is adequate to ensure non-discriminatory open access, and FERC continues to study entities, such as Regional Transmission Organizations (RTOs), that could overcome potential access problems. On May 14, 1999, the United States Court of Appeals for the Eighth Circuit ruled in a case between FERC and Northern States Power. The court held that the Commission overstepped its authority when it ordered Northern States Power Company to treat wholesale customers the same as it treats native load customers in making electricity curtailment decisions. This decision raises federal-state jurisdictional questions, particularly a state's right to guarantee system reliability.

FERC Order 888 also allows for full recovery of so-called stranded costs from wholesale customers wishing to leave their current supply arrangements. With the introduction of competition, utilities have been concerned that construction costs that they incurred under their monopoly service territory agreements may not be recovered. These costs, called stranded costs, can be viewed as a transition problem resulting from the movement from a comprehensive regulatory regime to a more competitively based electric generating sector.

The utilities' current investments in electric generating facilities are based on a "regulatory bargain" where utilities are obligated to serve wholesale customers through contractual arrangements and obligated to serve retail customers through their monopoly franchise rights. In return for providing service on demand, the regulatory authorities ensured financial integrity by permitting the utilities to recover, over a multi-year period, prudently incurred costs plus a reasonable rate of return. This system has been upset by the emergence of competitive forces in the electric generating system driving outside parties to build facilities that can generate electricity at lower cost than many utilities' embedded generating costs, competitive forces that national policy is nurturing and encouraging.

For some utilities, this shift in policy results in some of their investments, although prudently incurred under the regulatory system, potentially becoming uneconomic or "stranded" by the new market pricing mechanism. For example, utilities built nuclear capacity, some of which turned out not to be needed, which cost much more than comparable gas-fired capacity. In a competitive market, the cost of this capacity may be "stranded" by the availability of the lower cost gas-fired capacity. As a result, those utilities would have a difficult time recovering their capital investment in the higher cost nuclear facility.

Order 889, the Open Access Same-time Information System (OASIS) rule, establishes standards of conduct to ensure a level playing field. It requires utilities to separate their wholesale power marketing and transmission operation functions, but does not require corporate divestiture of assets.

On May 13, 1999, FERC issued a Notice of Proposed Rulemaking (NOPR) that described the minimum characteristics and functions of regional transmission organizations (RTOs). ⁽³⁾ The proposed rule required every transmission owning a utility regulated by FERC to file a regional transmission organization formation plan by October 15, 2000. Utilities already in some form of an RTO must file with FERC by January 15, 2001, to describe whether their transmission organization meets the criteria established in the RTO rulemaking. The proposed rule does not mandate RTO formation, but if an individual utility opts not to join an RTO, the utility is required to prove why it would be harmed by joining such an entity.

The final rule, Order 2000, was issued on December 20, 1999. ⁽⁴⁾ The final rule is very similar to the NOPR: the rule does not require RTO participation, set out RTO boundaries, or mandate the acceptable RTO structure. RTOs will be able to file with FERC as an independent system operator (ISO), a for-profit transmission company (transco) or another type of entity that has not yet been proposed. Although RTO participation is voluntary under Order 2000, FERC built in guidelines and safeguards to ensure independent operation of the transmission grid. RTOs are required to conduct independent audits to ensure that owners do not exert undue influence over RTO operation. The final rule also adds one RTO function that was not included in the NOPR: interregional coordination.

The criteria used in this report to compare these bills were derived from a CRS analysis of the basic issues surrounding electricity restructuring. ⁽⁶⁾ The nine initiatives summarized here -- H.R. 667, S. 516, H.R. 1587, H.R. 1828, H.R. 2050, S. 1284, H.R. 2944, S. 2098, and S. 2886 -- differ in the emphasis each takes in restructuring the electric utility industry. The issues and differing emphases are briefly summarized below.

(Note: For a comparison of 105th Congress bills, see CRS Report 97-504.)

Retail Competition

Retail competition refers to the ability of retail consumers to obtain their electric services from anyone willing to provide them with such services. Currently, such a scheme would entail a competitive generation market combined with a regulated transmission and distribution system. The transmission and distribution system currently are not considered amenable to competition, so that part of the electricity supply system would be regulated to provide customers access to the competitively based generation on a reasonable and nondiscriminatory basis. FERC Orders 888, 889 and 2000 represent FERC's attempt to achieve this competition on a wholesale level. However, FERC does not have jurisdiction over retail competition, as explicitly stated in EPACT. Currently, that is under the jurisdiction of the states.

S. 2886 is the only bill introduced in the 106^th Congress that includes a federal mandate requiring retail competition by a specific date. S. 2886 requires each State to implement retail competition by January 1, 2002, enforceable by appeal to federal court. FERC is given authority over all forms of interstate transmission - bundled, unbundled, retail, or wholesale. The bill limits stranded cost recovery provisions states may enacted after July 1, 2000, to no more than 50% of the total potential savings to consumers resulting from competition. S. 2886 also includes provisions authorizing FERC to establish and enforce reliability standards implemented by Regional Transmission Organizations (RTOs).

H.R. 667, S. 516, H.R. 1587, H.R. 2944 as reported, and S. 2098 do not include a federal mandate requiring retail competition by a specific date. Instead, each uses its own language to clarify that the states have jurisdiction over retail transmission or sale of electricity, and, with the exception of H.R. 2944 as reported, provides for reciprocity requirements to ensure that utilities in states without a retail competition program may not take retail customers away from utilities in states that do have a retail competition program.

H.R. 667 clarifies that states have the authority to order retail wheeling and to require reciprocity with respect to retail electricity sales by out-of-state utilities. H.R. 667 also leaves stranded cost recovery to the states, with two exceptions. First, stranded cost recovery resulting from PURPA-mandated contracts is guaranteed by FERC. Second, any state stranded cost recovery provision cannot be changed for seven years without that state losing its federal energy assistance monies. H.R. 667 contains no federal mandates with respect to establishing RTOs and to ensure reliability, leaving those matters to the states.

S. 516 clarifies that the states have jurisdiction over retail electric supply, excluding interstate transmission, and includes reciprocity requirements similar to those of H.R. 667. The bill contains no federal mandates with respect to stranded cost recovery, leaving that matter to the states. S. 516 does include extensive provisions requiring FERC to designate an Electric Reliability Organization to develop policies to ensure the reliable operation of the bulk-power system. Policies are subject to FERC approval and to oversight by a regional advisory body. The bill does not contain federal mandates for the establishment of RTOs.

H.R. 1587 clarifies state authority to order retail wheeling, and FERC authority over unbundled transmission. It also includes reciprocity requirements, although using differing language from that in H.R. 667, S. 516, or S. 1284. Like H.R. 667, H.R. 2050, and H.R. 2944. H.R. 1587 contains a federal mandate for stranded cost recovery from PURPA-mandated contracts, but otherwise leaves the issue to the states to resolve. H.R. 1587 encourages the creation of Independent System Operators (ISOs), and sanctions an Electric Reliability Council to advise and recommend reliability policies to FERC.

H.R. 1828 mandates retail competition by January 1, 2003, with enforcement provided through individual state courts. However, the Administration's proposal permits states and nonregulated utilities to "opt out" of retail competition if they determine such competition would have a negative impact on a class of customers that cannot be mitigated reasonably. Like S. 516 and S. 1284, H.R. 1828 contains no federal mandate with respect to stranded cost recovery, but does contain provisions designed to protect system reliability. These provisions include FERC authority to approve and oversee an Electric Reliability Organization to prescribe and enforce mandatory reliability standards and establishment of an Electricity Outage Investigation Board within DOE to investigate system outages. The bill also provides FERC with the authority to create independent transmission entities.

H.R. 2050 mandates retail competition by January 1, 2002, with enforcement provided through individual states courts. Like H.R. 1828, H .R. 2050 allows states and nonregulated utilities to "opt out" of retail competition if they determine the negative impacts can not be mitigated reasonably. Like H.R. 667, H.R. 1587, H.R. 2944, and S. 2098, H.R. 2050 provides for PURPA-related stranded cost recovery. However, H.R. 2050 would not apply where states have grandfathered state restructuring plans that respond to the issue. Like H.R. 1828, H.R. 2944, and S. 2098, H.R. 2050 contains provisions for a Electric Reliability Organization to prescribe and enforce mandatory reliability standards. Like H.R. 1828, the bill also provides FERC with the authority to create independent transmission entities.

S. 1284 provides for retail competition by removing any interpretation of the Federal Power Act that could be construed to authorize exclusive utility franchises or otherwise unduly discriminate against customers seeking to purchase electricity from any supplier they choose. It includes a nearly identical reciprocity provision to S. 2098; However, S. 1284 uses different reciprocity language from that in H.R. 667, S. 516, or H.R. 1587. Like S. 516 and H.R. 1828, S. 1284 contains no federal mandate with respect to stranded cost recovery. Also, S. 1284 contains no provisions with respect to reliability.

H.R. 2944 clarifies state authority to order retail wheeling, and FERC authority over unbundled transmission, but reciprocity provisions were removed during Subcommittee markup in October 1999. As reported, H.R. 2944 provides additional state authority with respect to the bill's consumer protection, interconnection, aggregation, and net metering provisions by providing that these provisions are waived in favor of any state law or regulation addressing those matters passed within 3 years of enactment. Indeed, this state pre-exemption authority may extend to any provision of H.R. 2944 that would "require a change" in a state's restructuring plan passed within 3 years of enactment. Like H.R. 667, H.R. 1587, H.R. 2050 and S. 2098, H.R. 2944 provides for PURPA-related stranded cost recovery, but otherwise leaves the issue to the states to resolve. Like H.R. 1828, H.R. 2050 and S. 2098, H.R. 2944 contains provisions for an Electric Reliability Organization to prescribe and enforce mandatory reliability standards. However, unlike H.R. 1828 and H.R. 2050, the bill does not provide FERC with the authority to create independent RTOs, but requires the utilities to form them.

S. 2098, like H.R. 1587 and H.R. 2944, clarifies state authority to order retail wheeling, and FERC authority over unbundled transmission. S. 2098 gives the federal government eminent domain rights to cite new transmission lines. Although S. 2098 uses different reciprocity language from that in H.R. 667, S. 516, or H.R. 1587, it is nearly identical to S. 1284. Like H.R. 667, H.R. 1587, H.R. 2944, and H.R. 2050, S. 2098 provides for PURPA-related stranded cost recovery. Like H.R. 1828, H.R. 2050 and H.R. 2944, S. 2098 contains provisions for an Electric Reliability Organization to prescribe and enforce mandatory reliability standards. S. 2098 allows utilities to join or form their own RTOS which would then preclude FERC from requiring a transmitting utility to participate in a different RTO.

PURPA

Section 210 of PURPA is commonly called the mandatory purchase requirement. With a comprehensive approach to competitive electric markets embedded in these initiatives, the mandatory purchase requirement of Section 210 of PURPA is considered by many to be outdated. Using similar language, under H.R. 667, H.R. 1587, H.R. 1828, H.R. 2050, S. 1284, H.R. 2944, S. 2098, and S. 2886, Section 210 would not apply to new contracts after the date of enactment. S. 516 provides that Section 210 of PURPA would not apply to new facilities that begin commercial operation after the date of enactment, unless a power purchase contract had been entered into before enactment. H.R. 667, H.R. 1587, H.R. 2050, S. 1284, H.R. 2944 and S. 2098, expressly state that existing PURPA contracts are unaffected by the repeal of Section 210 for new facilities. In contrast, S. 2886 provides that existing contracts with prices greater than 150% of wholesale market price may be voided by either party 5 years after enactment. Also, under H.R. 667, H.R. 1587, H.R. 2050, H.R. 2944 and S. 2098, utilities would be guaranteed by FERC to receive full recovery of stranded costs resulting from any existing PURPA contract.

H.R. 1828 and H.R. 2050 contain a renewable energy set-aside program (also called a renewable portfolio standard or RPS) to encourage renewable energy in face of PURPA repeal. H.R. 1828 provides that 7.5% of electricity sales must derive from non-hydroelectric renewable resources by the year 2010. H.R. 2050 provides that if electricity generation from non-hydroelectric renewable resources in 2004 is less than 3%, a 3% requirement will be instituted on electric suppliers beginning on January 1, 2005.

PUHCA

PUHCA was enacted to prevent the monopolistic abuses of the electric utility industry of the 1920s. However, with a comprehensive approach to competitive electric markets, PUHCA is viewed by many as an unnecessary impediment to competition. Concern about recurrence of the earlier abuses is generally addressed through provisions providing for improved access to company records by state commissions and FERC. H.R. 667, H.R. 1587, H.R. 2944, and S. 2098, would repeal PUHCA 12 months after enactment, replacing PUHCA's strictures with provisions enhancing federal and state commission access to company records. S. 516, S. 2886 and H.R. 1828 would do the same except 18 months after enactment. H.R. 2050 would also act 18 months after enactment, except that affected companies operating in two or more states that had opted out of retail competition would remain under PUHCA strictures. In addition, H.R. 667, S. 516, H.R. 1828, H.R. 2050, H.R. 2944, S. 2098, and S. 2886 make requests for information and records by state commissions enforceable in federal courts. In contrast, S. 1284 simply repeals PUHCA as of the date of enactment with no other provisions.

H.R. 1828 includes provisions to streamline FERC's review of mergers and authorize FERC to remedy market power problems in wholesale markets (and by petition from a state, in retail markets). H.R. 2050 and H.R. 2944 contain similar language to that in H.R. 1828 with respect to mergers. However, unlike H.R. 1828, H.R. 2050 gives FERC authority to remedy market power problems in retail markets either on its own or in response to a complaint from an affected person. In contrast, H.R. 2944 provides no additional authority to FERC to remedy market power problems.

The reader should note that this is a brief summary of major provisions, not a complete, comprehensive, word-for-word comparison of bills. Readers interested in the precise language of a given provision should refer to the bill in question.

Table 1: Summary of Major Provisions of H.R. 667, H.R. 1587, H.R. 1828, H.R. 2050, and H.R. 2944 as reported

Table 2: Summary of Major Provisions of S. 516, S. 1284, S. 2098, and S. 2886

Footnotes

1. ^(back)Wheeling is the transmission of electric power from one party to another party via a third party that does not own or directly use the power being transmitted.

2. ^(back)Cogeneration is the simultaneous production of electric power and thermal energy (i.e., steam). Cogeneration plants are considered qualifying facilities under PURPA.

3. ^(back) Docket No. RM99-2-000) http://cips.ferc.fed.us/Q/CIPS/RULES/RM/RM99-2.00C.TXT

4. ^(back) FERC Order 2000 can be found at: http://www.ferc.fed.us/news1/rules/pages/rulemake.htm

5. ^(back)The Administration's proposal has been introduced in the Senate as well as in the House. It was introduced in the Senate by Senator Murkowski (by request) as two separate bills. S. 1047 contains the body of the proposal while S. 1048 contains the various tax provisions. For the purposes of this comparison, the House bill number is used.

6. ^(back)Parker, Larry B. Electric Utility Restructuring: Overview of Basic Policy Questions. CRS Report 97-154. January 7, 1999.

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